Can These Mortgages Be Saved?

Sunday

Sep 30, 2007 at 5:27 AM

Lenders and government officials contend that troubled borrowers are being helped to stay in their homes. But neither data nor anecdotal evidence supports this view.

ON Christmas Eve two years ago, as Shannon Rivas-Spivey wrapped gifts for her two young sons, she was interrupted by a knock at her door. Standing on her front steps in Somers Point, N.J., was a man from the Atlantic County sheriff’s office, delivering foreclosure papers on the three-bedroom home that she and her fiancé, Harold Spivey, had owned for almost 10 years.

The visit was unwelcome, but not a surprise. Ms. Rivas-Spivey had been battling foreclosure for over a month, ever since the Countrywide Financial Corporation , the huge lender that services her loan, charged her escrow account for flood insurance she did not need and could not afford to pay. During the months it took to have Countrywide fix the error, she said, she fell behind on the loan.

There are two sides to every story, of course. Countrywide disputes Ms. Rivas-Spivey’s contention that billing her for unnecessary flood insurance essentially forced her into foreclosure. It said it has worked extensively with her to rescue her loan from default but that its efforts have failed.

Such painful, personal and financially damaging tugs of war between lenders and borrowers are likely to continue for quite some time. As the home mortgage boom of recent years continues to deflate, hundreds of thousands of borrowers are facing escalating monthly bills on adjustable-rate loans that are either in foreclosure or near it. In August, according to RealtyTrac, a home loan database, foreclosure filings across the country — default notices, auction sales notices and bank repossessions — soared to almost 244,000, up 36 percent from the previous month and more than double the number in August 2006.

Lenders, government officials and loan servicers, who take in borrowers’ monthly mortgage payments, contend that troubled borrowers everywhere are being helped to stay in their homes by those overseeing their loans. But neither data nor anecdotal evidence supports this view. A recent survey of 16 top subprime loan servicers by Moody’s Investors Service found that for the first six months of 2007, an average of only 1 percent of loans experiencing an interest rate adjustment, or reset, had been modified.

Moody’s did not identify the servicers it surveyed. But borrower advocates who work with a broad array of lenders say that none make it harder to modify loans than Countrywide, the nation’s largest mortgage originator and loan servicer. Countrywide deploys a 2,700-member unit, called the HOPE Team, that it says helps borrowers modify their loans and hold onto their homes. HOPE is an acronym for “Helping homeowners, Offering solutions, Preventing foreclosures and Envisioning success,” but some Countrywide borrowers say the company’s practices have left them hopeless.

According to a dozen borrowers interviewed for this article, and thousands more who are working with borrowers’ advocates, it is often difficult for homeowners to reach HOPE staff members. When they do, these people said, they encounter hostility and are charged large and unexplained fees throughout the foreclosure process — whether or not they wind up keeping their homes.

“Countrywide is trying to say they are doing workouts, but they are doing them with as little financial sacrifice for the company and as little effort as they can,” said Senator Charles E. Schumer, Democrat of New York and a member of the Senate Committee on Banking, Housing and Urban Affairs. “They are trying to get away with doing a good job here when you can prove by digging even a half an inch deeper that they’re not.”

Countrywide strongly disagrees. Last week, it described its efforts on behalf of troubled homeowners. “Our No. 1 priority is to help borrowers stay in their homes,” said Steve Bailey, a Countrywide executive, in a news release. The company said it has saved 39,582 mortgages from foreclosure so far this year.

But according to Countrywide’s own data, it currently services almost nine million mortgages, with a value of $1.45 trillion. Of those, roughly 450,000 are delinquent. So providing home preservation assistance on the 39,582 loans amounts to just 8.8 percent of Countrywide borrowers who have fallen behind.

Even so, the workouts that Countrywide boasted about last week include two types of deals that wind up forcing borrowers from their homes. Almost 14 percent of its homeownership preservation efforts involved borrowers who agreed to sell their homes for less than their loan amounts, called a short sale, or involved homeowners turning over their deeds to Countrywide to prevent a foreclosure. Countrywide did not disclose in its news release that such arrangements were included in its workout figures.

“When you look under the surface, they are counting deeds-in-lieu as a modification,” said Martin Eakes, chief executive of the Center for Responsible Lending, a nonprofit and nonpartisan research organization. “When you’ve taken someone’s house, even without the foreclosure process, to count that as a modification is worse than fiction.”

Mr. Bailey conceded that some might take that view but said in an interview, “At the end of the day, foreclosure avoidance is the theme we’re going after.”

AS the nation’s largest lender and loan servicer, Countrywide finds itself in the middle of the mortgage storm and a target of borrower anger. In August, it reported that delinquencies in its servicing portfolio stood at 4.9 percent of its total outstanding loan amounts, up from 3.65 percent at the same time last year.

Foreclosures are not far behind. Expressed as a percentage of the loans’ unpaid principal balances, they jumped to 1.2 percent in August from 0.48 percent a year earlier. Foreclosures pending as a percentage of total loans increased to 0.89 percent in August, up from 0.50 percent a year earlier.

To be sure, customers who borrowed from many lenders other than Countrywide are also experiencing difficulties with their loans. But because Countrywide was one of the most aggressive purveyors of adjustable-rate loans — the kind with interest rates that rise significantly after a low, two- or three-year teaser rate expires — it is not surprising, borrower advocates say, that overall problem mortgages are ratcheting up. The Mortgage Bankers Association said that adjustable-rate mortgages to subprime borrowers accounted for 44 percent of all new foreclosures in the second quarter of this year.

Even as Countrywide maintains that helping its borrowers modify their loans is its top priority, its investors have heard a slightly different story. In a conference call with analysts and investors in late July, Kevin Bartlett, Countrywide’s chief investment officer, counted about 2,000 loan modifications done in June. Most of those, he said, involved deferring overdue interest or adding the past due amount to a loan. The company rarely provides workouts that reduce interest rates on loans, Mr. Bartlett told investors.

Yet reducing rocketing interest rates is exactly the relief that many borrowers are seeking because, consumer advocates say, that is the only way they can afford to stay in their homes. Loan experts say that when workouts involve deferring overdue interest or tacking amounts owed onto the back of a loan, borrowers often wind up in trouble again in just a few years.

Mr. Bailey said that while Countrywide has historically done few interest rate reductions, it will be doing more. “Right now we have just about 1,000 loans facing interest rate reductions,” he said. “The pendulum is swinging that way.”

But Mark Seifert, executive director of Empowering and Strengthening Ohio’s People, a consumer advocacy group in Cleveland, is dubious. He said his experience with Countrywide, one of the dozen or so lenders and servicers with whom he works on behalf of borrowers, has been unsatisfactory.

For the first eight months of this year, he said, his group took in 132 cases in which Countrywide was the loan servicer. Of those, two ended up in what he called “very good” workouts from the company. One involved forged documents when the original loan was made, Mr. Seifert said, and the other involved a borrower who received her deal from Countrywide the day before she was set to testify before Congress last July about her problems with the company.

“We have experience with Citi, Chase and a whole litany of other lenders,” Mr. Seifert said. “Some are better than others, but we are successful more than half the time with all of them. Except Countrywide.”

Mr. Bailey said the views of Mr. Seifert and others reflected the fact that they were dealing with borrowers in duress. “We have had a lot of conversations with them and they don’t like the answer we’ve given them,” he said. “By the time the activist groups get involved in our loans, usually they are dealing with situations that are a little more grim.”

Lenders in general, and Countrywide in particular, say that they have no incentive to let a home go into foreclosure because all parties — homeowners and those who hold their loans — typically lose money in a distress sale. A 2003 Federal Reserve study found that estimated losses on foreclosures range from 30 percent to 60 percent of the outstanding loan balance, as a result of legal fees, lost interest payments and property costs. Countrywide said it incurred $600 million in losses on loans it holds in the first six months of 2007.

But on the billions of dollars worth of mortgage loans that have been sold to investors in the last few years, it is not the banks or lenders like Countrywide that are hit with big losses when homes go into foreclosure. It is the sea of faceless investors who own pieces of these trusts. Also, under the trusts’ pooling and servicing agreements, Countrywide and other servicers typically recoup any costs they cover in the foreclosure process, such as legal and appraisal fees.

Borrower advocates fear that fees imposed during periods of delinquency and even foreclosure can offset losses that lenders and servicers incur. Few borrowers know, for example, that when they make only partial payments on their mortgages, servicers do not credit those payments against the principal or interest on their loan. Instead, the partial payments are deposited into a so-called suspense account. Servicers can dip into these funds and make use of them as interest-free loans, although the funds have to be accessible when the borrower becomes current on payments. In the meantime, borrowers — whether or not they know it — are still zapped with fees and charges for delinquent mortgage payments.

“The foreclosure process is a profit opportunity for servicers and lenders, but there is very little oversight of the fees imposed,” said Michael D. Calhoun, president of the Center for Responsible Lending. “There are a lot of folks trying to squeeze distressed borrowers.”

JANE CONNOR, a Countrywide borrower who is a writing instructor at the Massachusetts Institute of Technology, certainly feels squeezed. In March, she says, she was forced from her Arlington, Mass., home, a three-story Victorian she bought in 1998 for $298,000. She fell behind on her mortgage in early 2006 after her husband lost his job and she learned she had breast cancer. Fremont General, a financial services concern, originated her adjustable-rate loan but Countrywide now services it.

Ms. Connor said her interest rate was around 11 percent and her monthly payments about $5,200 when she fell behind. In April 2006, with the principal balance on her loan at $442,645, because of a refinancing, she got a deal from Countrywide to pay around $5,000 in cash each month, payments she made on time in May, June and July of last year. But she says she was two days late in August, and Countrywide refused her payment.

“They told me I was $26,000 in arrears when I started making the payments,” she said. “But they didn’t accept the cash payment in August and when I called to ask about the problem, they said I had forfeited the workout arrangement by being two days late.”

At that point, Countrywide said Ms. Connor was behind by $43,000, nearly $20,000 more than she was a few months earlier. She said she did not understand why the figure had grown so fast in such a short time. A look at her documents shows how quickly the owed amount can rise, thanks to fees and unpaid interest.

In April 2007, for example, a payoff demand statement that Countrywide forwarded to Ms. Connor showed accrued interest on her loan totaling $64,105.13. Line items identified only as “fees due” and “additional fees and costs” totaled another $8,525. The statement shows that the total amount due to release the lien Countrywide held on Ms. Connor’s property was $520,649 — up from $442,634 when she went into delinquency almost exactly a year earlier.

The debt keeps mounting. By last week, her total amount due was $551,093. Since February 2006, she had accumulated added interest of $88,204 and nebulous “fees” of almost $11,000.

Mr. Bailey of Countrywide described the bulk of the fees as charges for legal work and other foreclosure expenses that are reimbursed to outside vendors. But some of the fees go to Countrywide units that provide title, appraisal and other services.

Still, Countrywide tried to extract other money from Ms. Connor. Last July, a few days before her house was to go on the auction block, she said she asked Countrywide for a delay so that a potential buyer who was willing to pay more than the company was owed could buy the home. The buyer was willing to close on the purchase in two weeks, without a home inspection.

Countrywide agreed to delay the auction for 30 days but only if she wired $5,900 in cash within a few days, Ms. Connor said. Countrywide said that the investor who holds her loan had asked for the payment. Although she refused to make it, Countrywide still delayed the auction.

Countrywide said it would not allow Ms. Connor to sell the home for $550,000 because it would also be forced to pay off a $25,000 home equity loan that Ms. Connor’s credit union holds on the property. She said Countrywide told her it would initially pay only $1,000 of the equity loan because its investors do not like to see it paying out money to another financial institution when a foreclosed house is sold.

Countrywide later increased the amount it would offer to the credit union to $3,500. Last week, after a reporter began asking about Ms. Connor’s situation, it raised that amount to $5,000.

Mr. Bailey of Countrywide said the problem is persuading the credit union to agree to take less than it is owed. “Jane Connor is frustrated that we are not agreeing to a short sale,” he said. “We would love for it to happen.”

But Ms. Connor said that navigating the Countrywide maze has been exasperating. Poring over her last three months of phone bills, she identified about 670 calls relating to her home foreclosure, most of them messages left with Countrywide. She said that last July, when she first began asking Countrywide to agree to a sale, she and her lawyer had to speak with 14 different people at the company — and received nine different answers about how best to proceed.

Countrywide says that because its HOPE Team is so large, communications problems will inevitably emerge. “With 2,700 employees, there are times when one of those employees wasn’t as responsive as they should have been,” Mr. Bailey said. “We have gotten good at managing; we are not at all difficult to contact.” He said that in August, Countrywide made 10.5 million attempts to reach delinquent borrowers.

Late last week, Countrywide stepped up its efforts to allow Ms. Connor’s sale to go through. Under the terms of the sale, which had not gone through as of Friday, both real estate agents agreed to cut their commissions. Countrywide would get almost all that it is owed.

BRUCE MARKS is founder of the Neighborhood Assistance Corporation of America, a nonprofit advocacy and mortgage company that helps troubled borrowers get new, low-cost loans. He sees problem mortgages from across the country and works with a variety of lenders. He said that his organization has resolved 3,500 cases for imperiled borrowers this year, and that none have had to leave their homes.

Mr. Marks, too, characterizes Countrywide as the lender most unwilling to help borrowers.

“Homeowners who are desperate to keep their homes are trying to restructure the mortgages to the payment before the rates reset,” he said. “Countrywide demands their last dollar and their retirement funds to stop a foreclosure on unaffordable loans.”

Ms. Rivas-Spivey said she was particularly disturbed that Countrywide’s flood insurance error helped push her into trouble. Her woes began when Countrywide took over her loan two years ago. It billed her escrow account to cover the unneeded flood insurance as well as the tax payments that she said she was making separately. She didn’t know that she was behind on her mortgage, she said, until Countrywide refused her November payment. By then, she was also in foreclosure.

Reaching anyone at Countrywide to help fix the problem was difficult, she recalled. When she did, she said, the company insisted that insurance was required on her property because of a recent change in the flood insurance rate map for her neighborhood. But Ms. Rivas-Spivey consulted with the Army Corps of Engineers and received a letter from it stating that the map had not changed since 1982.

Finally, in February 2006, Countrywide credited her escrow account for the flood insurance. In March, she received a letter from a Countrywide workout negotiator agreeing to correct her credit report for the months of August 2005 through February 2006. Still, with assorted late fees and owed payments piling up, she could not afford the loan. Neither could she afford the workout plan offered by Countrywide.

Ms. Rivas-Spivey said she and her fiancé cannot pay the current monthly mortgage, which recently rose 20 percent, to $1,875, and is scheduled to rise again soon. Interest owed, late fees and other charges have increased the loan to $196,000 from $141,000 in late 2005.

“I got two workout negotiators from Countrywide and they said ‘if you can’t afford your house, I can’t help you,’” she said. Mr. Bailey called Ms. Rivas-Spivey’s account of her dealings with Countrywide “confused.” The company corrected the flood insurance problem and put her on a workout program, he said, but she fell off after three months. “It’s difficult because she is so far behind,” Mr. Bailey said.

Although Ms. Rivas-Spivey and her family remain in their three-bedroom home, they put it on the market last week. “They put all the arrears on top of my payment,” she said. “Then it was impossible to pay, and we fell behind.”

ZENA COLLINS of Gaithersburg, Md., is yet another Countrywide borrower who, while not in foreclosure, is in financial difficulty. An analyst for the Plumbers and Pipefitters National Pension Fund in Washington, Ms. Collins refinanced into an interest-only loan after she lost a previous job that paid her twice what she earns now. She said her interest rate is 10.9 percent and that after she pays her loan and insurance, she has $600 a month left to live on.

Trying to act before foreclosure looms on her home, she has asked Countrywide to modify the terms of her loan. The company has refused. In a notice dated Sept. 20, Countrywide gave Ms. Collins this reason for being ineligible for help: “Borrower does not qualify.”

“I would like for the people who make these decisions to be put in the same position that I was, having to choose not to have electricity from time to time because I didn’t have any other option, really,” Ms. Collins said. “It makes one feel very desperate and hopeless.”

The national foreclosure wave, meanwhile, may soon become a tsunami. Some $120 billion in adjustable-rate mortgages are scheduled to reset at higher interest rates in the next three months. Subprime, adjustable-rate loans make up about $90 billion of that.

In a recent interview, a Countrywide mortgage specialist on the West Coast said he was disturbed by the sight of customers streaming into his branch asking for help on loans they could not afford. The employee, who was granted anonymity because he feared that Countrywide might retaliate against him, said it took a full day for him to reach the right department at Countrywide for loan workouts. Even he had difficulty reaching the right HOPE Team member, he said.

Such efforts may soon become more difficult. At an investor conference on Sept. 18, Angelo R. Mozilo, Countrywide’s chief executive, said the company would be hiring more staff members to do home-retention and loss-mitigation work. Those employees, however, will be based in India.

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